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New right of separation in holding companies due to lack of distribution of dividends: a first approach to their practical issues

03/04/2019
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News
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Corporate Law and Commercial Contracts

Mayo Torres analyzes the new right of separation in holding companies due to lack of dividend distribution introduced by article 348 bis of the Capital Companies Law

Article 348a(4) of the Capital Companies Law introduces a new right of separation for lack of dividends in parent companies of groups of companies.

This provision contemplates a series of requirements that must be met cumulatively and necessarily in order to exercise this new right, namely: the existence of consolidated accounts as the base scenario; that the general meeting of the parent company does not agree on the distribution as a dividend of at least 25% of the consolidated profits of the previous year, provided that they are legally distributable; and that consolidated profits attributed to the parent company during the previous 3 years have been obtained.

In an initial approach to the precept, we understand that relevant practical questions are raised, some of which are highlighted below:

What happens if the parent company does not comply with the obligation to prepare consolidated accounts?

On the one hand, it could be thought that the right of separation cannot be exercised due to the absence of a requirement, so that only the preparation of consolidated accounts and the corresponding liability of the directors of the parent company could be required, as they are causing damage in breach of their legal obligations; and, on the other hand, it could be reasonable that the right of separation could be exercised through the analysis of the individual annual accounts of all the companies in the group, with the parent company having to prove through the consolidated accounts that this circumstance is not met, thus giving rise to 2 aspects of interpretation.

In a holding company, are there two separation rights (the individual one considering only the dominant company and its own company as the dominant company of the group) or only one of them?

By not excluding them, the rule can be understood to mean that both rights come together, since their budgets and subjective scope for calculating distributable profits are different. However, it could also be argued that they are different and excluding cases, one general and one in group situations, so that if the parent company formulates consolidated accounts the rule provides for a specific separation right for this case that it excludes.

Does the exclusion of the right fit into the statutes of the dominant company?

Article 348a(1) of the LSC provides for the possibility of the statutory provisions excluding the right of separation, without making express mention in paragraph 4 of the same right within the dominant company.

However, with the expression "the same right of separation must be recognised for the shareholder of the dominant company" it is reasonable to interpret that both rights of separation are equal, in spite of being manifested in different circumstances, so that it would be equally excluding in the statutes of the dominant company, with no sense that one right was so and the other was not. On the other hand, if in the dominant company the right is excluded in its statutes without mentioning anything about the group, are both rights understood to be excluded? In principle, if we consider that they are two independent rights, it is logical to demand the exclusion of both in the statutes of the dominant company.

What happens if the holding company is not listed and the subsidiary is, would the right of separation apply?

There could be a circumstance in which the only assets of the unlisted parent company would be the holding in a listed controlled company. That is to say, the partners of the dominant company would have constituted a shareholders' syndicate by means of the constitution of the dominant company. We understand that there would be two positions: on the one hand, to understand that the right of separation would not apply in the dominant company, since the dominant company is a means to instrumentalize the participation in the listed company and the rules of the latter must be applied; on the other hand, insofar as the rule does not distinguish and being a dispositive rule, recognizing that a right of separation for the partners who do not vote in favour, it would be possible to defend the opposite with more than solid arguments.

What happens if there are profits in the subsidiaries, but there are no profits and/or reserves available in the parent company?

In this case, the directors of the parent company, in order to avoid the right of separation not excluded in the bylaws, must approve the distribution of the available dividends or reserves necessary in favour of the parent company so that the latter in turn can distribute the minimum dividend. To this end, while the maximum period for the payment of dividends is now 1 year, there is sufficient time to plan all the necessary actions.

Surely these and other issues will be raised in the application of the aforementioned precept, so we must be attentive to their treatment by case law and scientific doctrine, in order to achieve legal certainty and, particularly, admitting the ever-increasing existence of groups of companies.